UNITED
STATES SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K


(Mark
One)


XANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934.      For the fiscal year ended
      December 31, 2008





___TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF
      1934.       For the transition period
      from __________ to __________





Commission file number: 000-49892





PACIFIC STATE
BANCORP




(Exact
name of Registrant as specified in its charter)


California
              (State
      or other jurisdiction of incorporation or organization)
            61-1407606
              (I.R.S.
      Employer Identification No.)1899
      W. March Lane
              Stockton,
      CA
              (Address
      of principal executive offices)
            95207
              (Zip
      Code)


Registrant’s
telephone number, including area code:  (209) 870-3214





Securities
registered pursuant to Section 12(b) of the Act:





Title of
each
class:                                                                Name
of each exchange on which registered:





Common
Stock, no par
value                                                                           The
NASDAQ Stock Market, LLC





Securities
registered pursuant to Section 12(g) of the Act:


Common
Stock, no par value




Indicate
by check mark if the Registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.Yes [ ]No [X]





Indicate
by check mark if the Registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934.Yes [] No
[X]





Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  Yes [X] No []





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the Registrant’s knowledge, in definitive proxy or
information  statements incorporated by reference to Part III of this
Form 10-K or any amendment to this Form 10-K.  []





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in rule 12b-2 of the Exchange Act.


Large
accelerated filer [
]                                             Accelerated
filer [
]                                           Non-accelerated
filer (Do not check if a smaller reporting
company.)   []  Smaller reporting
company  [X]


Indicate
by check mark whether the registrant is a shell company (as defined in rule
12b-2 of the Exchange Act).Yes [ ] No [X]





The
aggregate market value of voting and non-voting stock held by non-affiliates of
the Registrant was approximately $30,164,000 as of June 30, 2008 which was
calculated based on the last reported sale of the Company's Common Stock on June
30, 2008.  This calculation does not reflect a determination that
certain persons are affiliates of the Registrant for any other
purpose.





Common
stock, no par value 3,718,598 shares outstanding as of March 13,
2009.




DOCUMENTS
INCORPORATED BY REFERENCE:




Annual
Report to Shareholders for Fiscal Year Ended December 31, 2008 (Part
II)


Proxy
Statement for 2009 Annual Meeting of Shareholders (Part III)


-1-





TABLE OF
CONTENTS


PART
      1.
                    
                    PageItem 1.
                    Business
                    3Item 1A.
                    Risk Factors
                    12Item 1B.
                    Unresolved Staff Comments
                    13Item 2.
                    Properties
                    13Item 3.
                    Legal Proceedings
                    13Item 4.
                    Submission of Matters to a Vote of Security
      Holders
                    13PART
      II.Item 5.
                    Market for Registrant’s Common Equity, Related Stockholder
      Matters and Issuer Purchases of Equity Securities
                    14Item 6.
                    Selected Financial Data
                    14Item 7.
                    Management’s Discussion and Analysis of Financial Condition and
      Results of Operation
                    14Item 7A.
                    Quantitative and Qualitative Disclosures about Market
      Risk
                    14Item 8.
                    Financial Statements and Supplementary Data
                    14Item 9.
                    Changes In and Disagreements with Accountants on Accounting and
      Financial Disclosure
                    14Item 9A
                    Controls and Procedures
                    15Item 9 B
                    Other Information
                    15PART
      III.Item 10.
                    Directors, Executive Officers and Corporate
      Governance
                    16Item 11.
                    Executive Compensation
                    16Item 12.
                    Security Ownership of Certain Beneficial Owners and Management
      and Related Stockholder Matters
                    16Item 13.
                    Certain Relationships and Related Transactions and Director
      Independence
                    16Item 14.
                    Principal Accountant Fees and Services
                    16PART
      IV.Item 15.
                    Exhibits, Financial Statement Schedules
                    17Signatures
                    18Index of Exhibits
                    19


-2-




PACIFIC
STATE BANCORP


STOCKTON,
CALIFORNIA


FORM
10-K


FISCAL
YEAR ENDED DECEMBER 31, 2008




PART I




ITEM 1. BUSINESS





FORWARD
LOOKING STATEMENTS


Certain
statements discussed or incorporated by reference in this Annual Report
including, but not limited to, information concerning possible or assumed future
results of operations of the Company set forth in the Management's Discussion
and Analysis of Financial Condition and Results of Operation, are
forward-looking statements within the meaning of the Securities Exchange Act of
1934 (the "Exchange Act"). Forward-looking statements include statements in
which words such as "expect," "anticipate," "intend," "plan," "believe,"
"estimate," "consider" or similar expressions are used. The Company’s actual
future results and shareholder values may differ materially from those
anticipated and expressed in these forward-looking statements, which are based
on management's beliefs and assumptions and on information currently available
to management, and are subject to risks and uncertainties that could cause
actual results to differ materially from those projected. Such risks and
uncertainties include, among others, (1) competitive pressures in the banking
industry; (2) changes in the interest rate environment; (3) general economic
conditions, either nationally or regionally; (4) changes in the regulatory
environment; (5) changes in business conditions and inflation; and (6) changes
in securities markets. Many of these factors are beyond the Company’s ability to
control or predict.  Investors are cautioned not to put undue reliance
on any forward-looking statements.  In addition, the Company does not
have any intention or obligation to update forward-looking statements contained
in this Annual Report, even if new information, future events or other
circumstances have made them incorrect or misleading. Except as specifically
noted herein all references to the "Company" refer to Pacific State Bancorp, a
California corporation





GENERAL
DESCRIPTION OF BUSINESS


Pacific
State Bancorp (the “Company”) is a holding company with one bank subsidiary,
Pacific State Bank, (the “Bank”), and two unconsolidated subsidiary grantor
trusts, Pacific State Statutory Trusts II and III.  Pacific State
Bancorp commenced operations on June 24, 2002 after acquiring all of the
outstanding shares of Pacific State Bank.  The Bank is a California
state chartered bank formed November 2, 1987. The Bank is a member of the
Federal Reserve System. The Bank’s primary source of revenue is interest on
loans to customers who are predominantly small to middle-market businesses and
middle-income individuals.  Pacific State Statutory Trusts II and III
are unconsolidated, wholly owned statutory business trusts formed in March 2004
and June 2007, respectively for the exclusive purpose of issuing and selling
trust preferred securities.





The Bank
conducts a general commercial banking business, primarily in the five county
region that comprises Alameda, Calaveras, San Joaquin, Stanislaus and Tuolumne
counties.  The Bank offers commercial banking services to residents
and employers of businesses in the Bank’s service area, including professional
firms and small to medium sized retail and wholesale businesses and
manufacturers.  The Company as of March 13, 2009 had 92 employees,
including 41 officers. The Bank does not engage in any non-bank lines of
business. The business of the Bank is not to any significant degree seasonal in
nature.  The Bank has no operations outside California and has no
material amount of loans or deposits concentrated among any one or few persons,
groups or industries.  The Bank operates nine branches with, its
Administrative Office and one branch located at 1899 W. March Lane, in Stockton,
California; additional branches are located in Stockton and in the communities
of Angels Camp, Arnold, Groveland, Lodi, Modesto, Tracy and Hayward,
California.





Pacific
State Bancorp common stock trades on the NASDAQ Global Market under the symbol
of “PSBC”.





-3-




BUSINESS
PLAN


The focus
of the Company’s business plan is to attract “Business Relationship” small,
medium and large accounts, but not to the exclusion of any other business which
the Company can reasonably and profitably attract.  In order to
provide a level of service to attract such customers, the Company has structured
its specific services and charges on a basis which management believes to be
profitable, taking into consideration other aspects of the account
relationship.  The Company offers a full range of banking services to
its customers intended to attract the following specific types of accounts:
relatively large consumer accounts; professional group and association accounts,
including the accounts of groups or firms of physicians, dentists, attorneys and
accountants; and accounts of small to medium-sized businesses engaged in retail,
wholesale, light industrial, manufacturing, agricultural and service
activities.





TRUST
SUBSIDIARIES


The
Company during 2004 and 2007 established two subsidiary grantor
trusts.  Pacific State Statutory Trusts II and III (the
“Trusts”).  The Trusts were established for the sole purpose of
issuing capital securities (“Capital Securities”) pursuant to declarations of
trust (the “Declarations”).  The proceeds from the sale of the Capital
Securities were loaned to the Company as subordinated debentures (the
“Debentures”) issued to the Trusts pursuant to indentures (the
“Indentures”).  Interest payments on the Debentures will flow through
the Trusts to the Pooling Vehicles, which are the holders of the Capital
Securities and similar securities issued by other financial
institutions.  Payments of distributions by the Trusts to the Pooling
Vehicle are guaranteed by the Company. See Note 8 to the Company’s consolidated
financial statements included with this report.





Proceeds
from the issuance of the 2004 subordinated debentures were used to provide the
Bank with an additional $3.5 million in capital in order to support the
continued growth of the Bank.  Proceeds from the issuance of the 2007
subordinated debentures were used to retire subordinated debenture issued in
2002 at a more favorable rate of interest.





PRODUCT
LINES AND SERVICES


The Bank
currently offers the following general banking services at all of its branches:
commercial, construction, agricultural and real estate loans and personal credit
lines, interest on checking, U.S. Savings bond services, domestic and foreign
drafts, banking by appointment, automatic transfer of funds between savings and
checking accounts, business courier services, checking and savings accounts for
personal and business purposes, domestic letters of credit, a depository for
MasterCard and Visa drafts, federal depository services, cash management
assistance, wire and telephone transfers, Individual Retirement Accounts, time
certificates of deposit, courier service for non-cash deposits, Visa and
MasterCard, revolving lines of credit to consumers secured by deeds of trust on
private residences, unsecured overdraft protection credit lines attached to
checking accounts,  ATM cards and MasterMoney debit cards via the
Star, Cirrus, Plus, MasterCard and Visa networks.





The Bank
is not authorized to offer trust services.  The Federal Reserve Bank
of San Francisco is the Company’s primary correspondent
relationship.  The Bank currently also has correspondent relationships
with City National Bank in Beverly Hills, California, First Tennessee Bank in
Memphis, Tennessee, Wells Fargo Bank, San Francisco, California and Pacific
Coast Bankers Bank, San Francisco, California.





The Bank
recognizes that, in order to be competitive, it must attract a certain number of
consumer accounts.  Individual Retirement Accounts, Visa and
MasterCard, revolving lines of credit to consumers secured by deeds of trust on
private residences, and unsecured overdraft protection credit lines attached to
checking accounts currently offered by the Bank are designed to appeal
particularly to consumers.  Moreover, participation in large-scale ATM
networks assists the Company in competing for consumer accounts.





The Bank
is an approved Small Business Administration and 504 lender, FSA, USDA Business
and Industry, USDA Part-time Farmer Program and FHA and VA
lender.  The Bank is a national leader in the underwriting of U.S.
Department of Agriculture business and industry loans, as well as a Preferred
Lender for this program.





MARKETING


The basic
marketing strategy of the Bank is to retain the Bank’s initial market share and
to increase the Bank’s penetration of the market over the long term via
expansion east and west of Stockton, California in small to medium sized
communities.  The Bank attempts to accomplish this by providing a full
range of personalized banking services to small and medium size businesses,
professionals and individuals within Alameda, Calaveras, San Joaquin, Stanislaus
and Tuolumne Counties.





The
Bank’s marketing plan aims to provide for strong continuity in banker-customer
relationships, a high degree of convenience for customers, prompt response in
the handling of loan requests, and personal attention to needs of individual
customers.  The marketing plan also includes a commitment to lend the
Bank’s deposits back into the areas from which they are derived, thereby
assisting in the building activity, population growth and other changes, which
are occurring in the market area.  By focusing the Bank’s relationship
toward its community the Bank attempts to establish strong continuity with its
customers.





The
Directors of the Company are active in business development through personal
contacts and personal participation in local activities.  The
Directors of the Company have a strong commitment to community
banking.  They believe in business development by actively
participating in community events.





Local
advertising and publicity in local papers also are used to attract business and
to acquaint potential customers with the Bank’s services.


-4-





COMPETITION


The
Bank’s service area consists of Alameda, Calaveras, San Joaquin, Stanislaus and
Tuolumne Counties.  The banking business in California generally, and
specifically in the Bank’s primary market area, is highly competitive with
respect to both loans and deposits.  The banking business is dominated
by a relatively small number of major banks, which have many offices operating
over wide geographic areas.  Many of the major commercial banks offer
certain services (such as international, trust and securities brokerage
services), which are not offered directly by the Bank.  By virtue of
their greater total capitalization, such banks have substantially higher lending
limits than the bank and substantial advertising and promotional
budgets.





In the
past, an independent bank’s principal competitors for deposits and loans have
been other banks (particularly major banks), savings and loan associations and
credit unions.  To a lesser extent, competition was also provided by
thrift and loans, mortgage brokerage companies and insurance
companies.  Other institutions, such as brokerage houses, credit card
companies, and even retail establishments have offered new investment vehicles,
such as money-market funds, which also compete with banks.  The
direction of federal legislation in recent years seems to favor competition
between different types of financial institutions and to foster new entrants
into the financial services market, and it is anticipated that this trend will
continue.





To
compete with major financial institutions in its service area, the Bank relies
upon specialized services, responsive handling of customer needs, local
promotional activity, and personal contacts by its officers, directors and
staff, as opposed to large multi-branch banks, which compete primarily by
interest rates and multiple branch locations.  For customers whose
loan demands exceed the Bank’s lending limits, the Bank seeks to arrange funding
for such loans on a participation basis with its correspondent banks or other
independent commercial banks.





SUPERVISION
AND REGULATION


The
Company is principally regulated by the Federal Reserve Board (“FRB”). The Bank
is principally regulated by the California Commissioner of Financial
Institutions (“Commissioner”), but is also subject to regulation by the Federal
Deposit Insurance Corporation (“FDIC”) and by its primary federal regulator, the
FRB. These agencies govern most of the Company’s and the Bank’s business,
including capital requirements, loans, investments, mergers and acquisitions,
borrowings, dividends, branch locations and other similar matters.  In
addition, the Bank’s business is affected by general economic conditions and by
the monetary and fiscal policies of the United States
government.  These policies influence, for example, the Federal
Reserve’s open market operations in U.S. Government securities, the reserve
requirements imposed upon commercial banks, the discount rates applicable to
borrowings from the Federal Reserve by banks, and other similar matters which
impact the growth of the Bank’s loans, investments and deposits and the interest
rates which the Bank charges and pays.





Proposals
to change the laws and regulations governing the operations and taxation of
financial institutions are frequently made in Congress, in the California
legislature and before various regulatory and professional
agencies.  Major changes and the impact such changes might have are
difficult to predict with accuracy. Certain significant recently proposed or
enacted laws and regulations are discussed below.





INTERSTATE
BANKING


Since
1995, initial entry into California by merger or acquisition involving an out-of
state institution must be accomplished by acquisition of or merger with an
existing whole bank which has been in existence for at least five
years.





-5-




CAPITAL
REQUIREMENTS


The
Company and the Bank are subject to certain regulatory capital requirements
administered by the FRB and the FDIC. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company and the Bank must
meet specific capital guidelines that involve quantitative measures of their
assets, liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. The Company’s and the Bank’s capital amounts
and classifications are also subject to qualitative judgments by the regulators
about the components, risk weightings and other factors.





The
Uniform Financial Institutions Rating System classifies and evaluates the
soundness of financial institutions according to the so-called “CAMELS”
criteria, an acronym for capital adequacy, asset quality, management, earnings,
liquidity and sensitivity to market risk, (including changes in interest rates,
foreign exchange rates, commodity prices or equity prices which may adversely
affect an institution’s earnings and capital).





Prompt
Corrective Action regulations (the “PCA Regulations”) of the federal bank
regulatory agencies establish five capital categories in descending order (well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized), assignment to which depends
upon the institution’s total risk-based capital ratio, Tier 1 risk-based capital
ratio, and leverage ratio.  Institutions classified in one of the
three undercapitalized categories are subject to certain mandatory and
discretionary supervisory actions, which include increased monitoring and
review, implementation of capital restoration plans, asset growth restrictions,
limitations upon expansion and new business activities, requirements to augment
capital, restrictions upon deposit gathering and interest rates, replacement of
senior executive officers and directors, and requiring divestiture or sale of
the institution.  The Bank is currently classified as a well
capitalized bank pursuant to the PCA regulations. As of
December 31, 2008, the Bank’s total risk-based capital ratio (approximately
11.3%) and its leverage ratio (approximately 8.7%) exceeded minimum
levels.





FEDERAL
DEPOSIT INSURANCE


The
deposits of the Bank have historically been insured by the FDIC up to $100,000
per insured depositor, except certain types of retirement accounts, which are
insured up to $250,000 per insured depositor. On October 3, 2008, the
maximum amount insured under FDIC deposit insurance was temporarily increased
from $100,000 to $250,000 per insured depositor through December 31, 2009.
This increase was part of the Emergency Economic Stabilization Act of 2008.
Additionally, the Bank has elected to participate in those provisions of the
FDIC’s Transaction Account Guarantee Program that provide additional insurance
coverage on non-interest bearing deposit transaction accounts. Under this
program, all non-interest bearing transaction accounts at the Bank with balances
over $250,000 will also be fully insured through December 31, 2009 at an
additional annual cost to the Bank of 10 basis points per dollar over $250,000.
Both of these initiatives are described in further detail below under the
heading “Recent Regulatory Developments.”




On
December 16, 2008, the FDIC approved an earlier proposed seven basis point rate
increase for the first quarter 2009 assessment period effective January 1, 2009
as part of the Deposit Insurance Fund restoration plan to achieve a minimum
Designated Reserve Ratio of 1.15 percent within five years.




On
February 27, 2009, the FDIC issued a press release with attached final rule
dated February 26, 2009, which established increased assessment rates effective
as of April 1, 2009 and included adjustments to improve differentiation of risk
profiles among institutions. The FDIC concurrently issued an interim rule that
imposes a 20 basis point emergency special assessment effective June 30, 2009,
to be collected from all insured depository institutions on September 30, 2009,
in addition to the imposition of an emergency special assessment of up to 10
basis points at the end of any calendar quarter after June 30, 2009 if the FDIC
determines the DIF reserve ratio will fall to a level that would adversely
affect public confidence, among other factors. The proposed changes to
differentiate risk profiles will require riskier institutions to pay higher
assessment rates based on classification into one of four risk categories.
Within each category, the FDIC will be able to assess higher rates to
institutions with a significant reliance on secured liabilities, which generally
raises the FDIC’s loss in the event of failure without providing additional
assessment revenue. The proposal also would assess higher rates for institutions
with a significant reliance on brokered deposits but, for well-managed and
well-capitalized institutions, only when accompanied by rapid asset growth. The
proposal also would provide incentives in the form of a reduction in assessment
rates for institutions to hold long-term unsecured debt and, for smaller
institutions, high levels of Tier 1 capital. Together, the changes would improve
the way the system differentiates risk among insured institutions and help
ensure that a minimum Designated Reserve Ratio of at least 1.15 percent by the
end of 2013.




Based
upon the announced increase in assessments for insured financial institutions in
2009 as described above and the continuing adverse economic conditions impacting
financial institutions generally which may necessitate further increases in
assessments, the Bank anticipates that such assessments will have a
significantly greater impact upon operating expenses in 2009 compared to
2008.





-6-




COMMUNITY
REINVESTMENT ACT


Community
Reinvestment Act (“CRA”) regulations evaluate the Bank’s lending to low and
moderate income individuals and businesses across a four-point scale from
“outstanding” to “substantial noncompliance,” and are a factor in regulatory
review of applications to merge, or establish new branches. In addition, any
Bank rated in “substantial noncompliance” with the CRA regulations may be
subject to enforcement proceedings.  The Bank has a current rating of
“satisfactory” CRA compliance.





SAFETY
AND SOUNDNESS STANDARDS


Federal
bank regulations for insured financial institutions establish safety and
soundness standards for (1) internal controls, information systems and internal
audit systems; (2) loan documentation; (3) credit underwriting; (4) interest
rate exposure; (5) asset growth; (6) compensation, fees and benefits; and (7)
excessive compensation. If an agency determines that an institution fails to
meet any standard established by the guidelines, the agency may require the
financial institution to submit to the agency an acceptable plan to achieve
compliance with the standard.  Agencies may elect to initiate
enforcement action in certain cases where failure to meet one or more of the
standards could threaten the safe and sound operation of the
institution.





SARBANES-OXLEY
ACT OF 2002


The
Sarbanes-Oxley Act of 2002 (the “SOA”) was enacted to increase corporate
responsibility, to provide for enhanced penalties for accounting and auditing
improprieties at publicly traded companies and to protect investors by improving
the accuracy and reliability of corporate disclosures pursuant to the securities
laws.





The SOA
is the most far-reaching U.S. securities legislation enacted in many years. The
SOA generally applies to all companies, both U.S. and non-U.S., that file or are
required to file periodic reports with the Securities and Exchange Commission,
(“the SEC”), under the Securities Exchange Act of 1934. Since the enactment of
the SOA, the SEC has issued numerous new and proposed regulations to implement
SOA requirements.





The SOA
represents significant federal involvement in matters traditionally left to
state regulatory systems, such as the regulation of the accounting profession,
and to state corporate law, such as the relationship between a board of
directors and management and between a board of directors and its
committees.





The SOA
addresses the following, among other matters:





·
            Duties,
      responsibilities and qualifications of the audit
  committee;


·
            Certification
      of financial statements by the Principal Executive Officer  and
      the Chief Financial Officer;


·
            The
      forfeiture of bonuses or other incentive-based compensation and profits
      from the sale of an issuer’s securities by directors and senior officers
      in the twelve month period following initial publication of any financial
      statements that later require
restatement;


·
            A
      prohibition on insider trading during pension plan black out
      periods;


·
            Disclosure
      of off-balance sheet transactions;


·
            A
      prohibition on certain personal loans to directors and
      officers;


·
            Expedited
      filing requirements for forms which disclose transactions by officers and
      directors in Company stock ;


·
            Disclosure
      of a code of ethics and of any change or waiver of such
    code;


·
            New
      requirements for auditing and reporting on Company internal
      controls;


·
            “Real
      time” filing of periodic reports;


·
            The
      formation of a public company accounting oversight board (the “PCAOB”)
      with authority to set auditing, quality control and independence standards
      and investigate and discipline public accounting
  firms;


·
            Auditor
      independence; and


·
            Various
      increased criminal penalties for violations of securities
      laws.





Although
we have incurred additional expense in complying with the provisions of the SOA,
such compliance did not have a material impact on our results of operation or
financial condition.





-7-




FINANCIAL
SERVICES MODERNIZATION LEGISLATION


On
November 12, 1999, the Gramm- Leach-Bliley Act of 1999 (the "Financial Services
Modernization Act") was signed into law. The Financial Services Modernization
Act is intended to modernize the banking industry by removing barriers to
affiliation among banks, insurance companies, the securities industry and other
financial service providers. It provides financial organizations with the
flexibility of structuring such affiliations through a holding company structure
or through a financial subsidiary of a bank, subject to certain limitations. The
Financial Services Modernization Act establishes a new type of bank holding
company, known as a financial holding company, which may engage in an expanded
list of activities that are "financial in nature," which include securities and
insurance brokerage, securities underwriting, insurance underwriting and
merchant banking. The Company has not sought “financial holding company” status
and has no present plans to do so.





The
Financial Services Modernization Act also sets forth a system of functional
regulation that makes the Federal Reserve Board the "umbrella supervisor" for
holding companies, while providing for the supervision of the holding company's
subsidiaries by other federal and state agencies.





In
addition, the Bank is subject to other provisions of the Financial Services
Modernization Act, including those relating to CRA, privacy and safe-guarding
confidential customer information, regardless of whether the Company elects to
become a financial holding company or to conduct activities through a financial
subsidiary of the Bank. The Company does not, however, currently intend to file
notice with the Federal Reserve Board to become a financial holding company or
to engage in expanded financial activities through a financial subsidiary of the
Bank.





The
Financial Services Modernization Act did not have a material adverse effect on
their operations in the near-term. However, to the extent that it permits banks,
securities firms, and insurance companies to affiliate, the financial services
industry may experience further consolidation. The Financial Services
Modernization Act is intended to grant to community banks certain powers as a
matter of right that larger institutions have accumulated on an ad hoc basis.
Nevertheless, this act may have the result of increasing the amount of
competition that the Company faces from larger institutions and other types of
companies offering financial products, many of which may have substantially more
financial resources than the Company.




USA
PATRIOT ACT OF 2001


On
October 26, 2001, President Bush signed the USA Patriot Act (the
"Patriot Act"), which includes provisions pertaining to domestic security,
surveillance procedures, border protection, and terrorism laws to be
administered by the Secretary of the Treasury. Title III of the Patriot Act
entitled, "International Money Laundering Abatement and Anti-Terrorist
Financing Act of 2001" includes amendments to the Bank Secrecy Act which
expand the responsibilities of financial institutions in regard to
anti-money laundering activities with particular emphasis upon
international money laundering and terrorism financing activities through
designated correspondent and private banking accounts. Certain surveillance
provisions of the Patriot Act were scheduled to expire on December 31,
2005, but the deadline was postponed to allow time for evaluation of such
provisions, and on March 9, 2006, President Bush signed legislation
to reauthorize the Patriot Act, incorporating certain civil liberty
protections approved by Congress.





Section
313(a) of the Patriot Act prohibits any insured financial institution such
as Pacific State Bancorp from providing correspondent accounts to foreign
banks which do not have a physical presence in any country (designated as
"shell banks"), subject to certain exceptions for regulated affiliates of
foreign banks. Section 313(a) also requires financial institutions to take
reasonable steps to ensure that foreign bank correspondent accounts are not
being used to indirectly provide banking services to foreign shell banks,
and Section 319(b) requires financial institutions to maintain records of
the owners and agent for service of process of any such foreign banks with
whom correspondent accounts have been established.





Section
312 of the Patriot Act creates a requirement for special due diligence for
correspondent accounts and private banking accounts. Under Section 312,
each financial institution that establishes, maintains, administers, or
manages a private banking account or a correspondent account in the United
States for a non-United States person, including a foreign individual
visiting the United States, or a representative of a non-United States
person, shall establish appropriate, specific, and, where necessary,
enhanced, due diligence policies, procedures, and controls that are
reasonably designed to detect and record instances of money laundering
through those accounts.





The
Company and its subsidiaries are not currently aware of any
account relationships between the Company and its banking subsidiaries and
any foreign bank or other person or entity as described above under
Sections 313(a) or 312 of the Patriot Act. The terrorist attacks on
September 11, 2001 have realigned national security priorities of the
United States and it is reasonable to anticipate that the United States
Congress may enact additional legislation in the future to combat terrorism
including modifications to existing laws such as the Patriot Act to expand
powers as deemed necessary. The effects which the Patriot Act and any
additional legislation enacted by Congress may have upon financial
institutions is uncertain; however, such legislation would likely increase
compliance costs and thereby potentially have an adverse effect upon the
Company's results of operations.





-8-




RECENT
REGULATORY DEVELOPMENTS


In
response to global credit and liquidity issues involving a number of financial
institutions, the United States government, particularly the United States
Department of the Treasury (the “U.S. Treasury”) and the Federal financial
institution regulatory agencies, have taken a variety of extraordinary measures
designed to restore confidence in the financial markets and to strengthen
financial institutions, including capital injections, guarantees of bank
liabilities and the acquisition of illiquid assets from banks.




Emergency Economic Stabilization
Act. On October 3, 2008, the Emergency Economic Stabilization Act of
2008 (the “EESA”) was signed into law. Pursuant to the EESA, the U.S. Treasury
was granted the authority to take a range of actions for the purpose of
stabilizing and providing liquidity to the U.S. financial markets and has
implemented several programs, including the purchase by the U.S. Treasury of
certain troubled assets from financial institutions under the Troubled Asset
Relief Program” (the “TARP”) and the direct purchase by the U.S. Treasury of
equity securities of financial institutions under the Capital Purchase Program
(the “CPP”).




Capital Purchase Program. On
October 24, 2008, the U.S. Treasury announced plans to direct $250 billion of
the TARP funding into the CPP to acquire preferred stock investments in bank
holding companies and banks.  Requirements for bank holding companies and
banks eligible to participate as a Qualifying Financial Institution (“QFI”) in
the CPP include:




·
            Submission
      of an application prior to November 14, 2008 to the QFI’s Federal banking
      regulator to obtain preliminary approval to participate in the
      CPP;


·
            If
      the QFI receives preliminary approval, it will have 30 days within which
      to submit final documentation and fulfill any outstanding
      requirements;


·
            The
      minimum amount of capital eligible for purchase by the U.S. Treasury under
      the CPP is 1 percent of the Total Risk-Weighted Assets of the QFI and the
      maximum is the lesser of (i) an amount equal to 3 percent of the Total
      Risk-Weighted Assets of the QFI or (ii) $25
  billion;


·
            Capital
      acquired by a QFI under the CPP will be accorded Tier 1 capital
      treatment;


·
            The
      preferred stock issued to the U.S. Treasury will be non-voting (except in
      the case of class votes), senior perpetual preferred stock that ranks
      senior to common stock and pari passu with existing preferred stock
      (except junior preferred stock);


·
            In
      addition to the preferred stock, the U.S. Treasury will be issued warrants
      to acquire shares of the QFI’s common stock equal in value to 15 percent
      of the amount of capital purchased by the
QFI;


·
            Dividends
      are payable to the U.S. Treasury at the rate of 5% per annum for the first
      5 years and 9% per annum
thereafter;


·
            Subject
      to certain exceptions and other requirements, no redemption of the
      preferred stock is permitted during the first 3
  years;


·
            Certain
      restrictions on the payment of dividends to shareholders of the QFI shall
      remain in effect while the preferred stock purchased by the U.S. Treasury
      is outstanding;


·
            Repurchase
      of the QFI’s stock requires consent of the U.S. Treasury, subject to
      certain exceptions;


·
            The
      preferred shares are not subject to any contractual restrictions on
      transfer by the U.S. Treasury; and


·
            The
      QFI must agree to be bound by certain executive compensation and corporate
      governance requirements and senior executive officers must agree to
      certain compensation restrictions.




Temporary Liquidity Guarantee
Program. Among other programs and actions taken by the U.S. Treasury and
other regulatory agencies, the FDIC implemented the Temporary Liquidity
Guarantee Program (the “TLGP”) to strengthen confidence and encourage liquidity
in the financial system. The TLGP is comprised of the Debt Guarantee Program
(the “DGP”) and the Transaction Account Guarantee Program (the “TAGP”). The DGP
guarantees all newly issued senior unsecured debt (e.g., promissory notes,
unsubordinated unsecured notes and commercial paper) up to prescribed limits
issued by participating entities beginning on October 14, 2008 and
continuing through October 31, 2009.  For eligible debt issued by that
date, the FDIC will provide the guarantee coverage until the earlier of the
maturity date of the debt or June 30, 2012. The TAGP offers full guarantee
for noninterest-bearing transaction accounts held at FDIC-insured depository
institutions. The unlimited deposit coverage was voluntary for eligible
institutions and was in addition to the $250,000 FDIC deposit insurance per
account that was included as part of the EESA. The insured deposit limits are
currently scheduled to return to $100,000 on January 1, 2010, except for
certain retirement accounts. The TAGP coverage became effective on
October 14, 2008 and is scheduled to continue for participating
institutions until December 31, 2009.  The Bank opted to participate
in the TAGP.




Initially,
the TLGP programs, the DGP and TAGP, were provided at no cost for the first
30 days. On November 3, 2008, the FDIC extended the opt-out period to
December 5, 2008 to provide eligible institutions additional time to
consider the terms before making a final decision regarding participation in the
program. Participants in the DGP are charged an annualized fee ranging from 50
basis points to 100 basis points (depending on the maturity of the debt issued)
multiplied by the amount of debt issued, and calculated for the maturity period
of that debt, or through June 30, 2012, whichever is earlier. The Bank is
authorized to participate in the DGP and can issue debt at a later date if
management determines it necessary.  As of December 31, 2008, the Bank
has no senior unsecured debt outstanding.  The Bank has not determined
whether to issue qualifying senior debt securities under the DGP as part of its
liquidity planning for 2009 or thereafter. In addition to the existing
risk-based deposit insurance premium paid on such deposits, TAGP participants
will be assessed, on a quarterly basis, an annualized 10 basis points fee on
balances in noninterest-bearing transaction accounts that exceed the existing
deposit insurance limit of $250,000.




Financial Stability Plan. On
February 10, 2009, the U.S. Treasury announced a Financial Stability Plan (the
“FSP”) as a comprehensive approach to strengthening the financial system and
credit crisis. The Plan includes a Capital Assistance Program (the “CAP”) that
is intended to serve as a bridge to raising private capital and to ensure
sufficient capital to preserve or increase lending in a worse-than-expected
economic deterioration. Eligibility to participate in the CAP will be consistent
with the criteria for QFI’s under the CPP. Eligible institutions with
consolidated assets in excess of $100 billion will be able to obtain capital
under the CAP, subject to a supervisory review process and comprehensive stress
test assessment of the losses that could occur over a two year period in the
future across a range of economic scenarios, including conditions more severe
than anticipated or as typically used in capital planning processes. Eligible
institutions with consolidated assets below $100 billion will be able to obtain
capital under the CAP after a supervisory review.  As announced, the CAP
includes issuance of a convertible preferred security to the U.S. Treasury at a
discount to the participating institution’s stock price as of February 9, 2009,
subject to a dividend to be determined. The security instrument will be designed
to incentivize institutions to replace the CAP capital with private capital or
redeem it. Institutions participating in the CPP under TARP may also be
permitted to exchange their CPP preferred stock for the convertible preferred
CAP security. Among the other elements of the FSP, is a temporary extension by
the FDIC of the TLGP for enhancing financial institution liquidity to October
31, 2009.   On February 25, 2009, the FDIC and other regulatory
agencies jointly announced the commencement of the stress test assessment with
the intention to complete the process of assessment not later than April
2009.




-9-




American Recovery and Reinvestment
Act. On February 17, 2009, the American Recovery and Reinvestment
Act of 2009 (the “ARRA”) was signed into law. Section 7001 of the ARRA
amended Section 111 of the EESA in its entirety. While the U.S. Treasury
must promulgate regulations to implement the restrictions and standards set
forth in Section 7001, the ARRA, among other things, significantly expands
the executive compensation restrictions previously imposed by the EESA. Such
restrictions apply to any entity that has received or will receive financial
assistance under the TARP, and shall generally continue to apply for as long as
any obligation arising from financial assistance provided under the TARP,
including preferred stock issued under the CPP, remains outstanding. These ARRA
restrictions do not apply to any TARP recipient during such time when the
Federal government (i) only holds any warrants to purchase common stock of
such recipient or (ii) holds no preferred stock or warrants to purchase
common stock of such recipient. Since the Bank has not yet determined to
participate in the CPP, the restrictions and standards set forth in
Section 7001 of the ARRA are not currently applicable to the
Bank.




Term Asset-Backed Securities Loan
Facility. On March 3, 2009, the U.S, Treasury and the Board of Governors
announced the Term Asset-Backed Securities Loan Facility (the “TALF”). The TALF
is one of the programs under the Financial Stability Plan announced by the U.S.
Treasury on February 10, 2009. The TALF is intended to help stimulate the
economy by facilitating securitization activities which allow lenders to
increase the availability of credit to consumers and businesses. Under the TALF,
the Federal Reserve Bank of New York (“FRBNY”) will lend up to $200 billion to
provide financing to investors as support for purchases of certain AAA-rated
asset-backed securities (“ABS”) initially for newly and recently originated auto
loans, credit card loans, student loans, and SBA-guaranteed small business loans
anticipated to be funded on March 25, 2009, and rental, commercial, and
government vehicle fleet leases, small ticket equipment, heavy equipment, and
agricultural equipment loans and leases proposed to be funded in
April.




ABS
fundings will be held monthly beginning on March 25, 2009 through December 2009,
or longer if the TALF is extended. The loan asset classes may be expanded in the
future to include commercial mortgages, non-Agency residential mortgages, and/or
other asset classes. Credit extensions under the TALF will be non-recourse loans
to eligible borrowers secured by eligible collateral for a three-year term with
interest paid monthly. Any U.S. company that owns eligible collateral may borrow
from the TALF, provided the company maintains an account with a primary dealer
who will act as agent for the borrower and deliver eligible collateral to the
FRBNY custodian in connection with the loan funding. The FRBYN will create a
special purpose vehicle (“SPV”) to purchase and manage any assets received by
the FRBYN in connection with the TALF loans.




The U.S.
Treasury will provide $20 billion of credit protection to the FRBNY in
connection with the TALF through the Troubled Assets Relief Program (the “TARP”)
by purchasing subordinated debt issued by the SPV to finance the first $20
billion of asset purchases. If more than $20 billion in assets are purchased by
the SPV, the FRBNY will lend additional funds to the SPV to finance such
additional purchases. The FRBNY’s loan to the SPV will be senior to the TARP
subordinated loan and secured by all of the assets of the SPV.




TRANSACTIONS
BETWEEN AFFILIATES


Transactions
between a bank and its "affiliates" are quantitatively and qualitatively
restricted under the Federal Reserve Act. The Federal Reserve Board issued
Regulation W on October 31, 2002, which comprehensively implements Sections
23A and 23B of the Federal Reserve Act. Sections 23A and 23B and Regulation W
restrict loans by a depository institution to its affiliates, asset purchases by
a depository institution from its affiliates, and other transactions between a
depository institution and its affiliates. Regulation W unifies in one public
document the Federal Reserve Board’s interpretations of Section 23A and 23B.
Regulation W had an effective date of April 1, 2003.





SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES





FAIR
VALUE MEASUREMENTS


In
September 2006, the Financial Accounting Standards Board (FASB) issued SFAS
No. 157, Fair Value
Measurements, which defines and establishes a framework for measuring
fair value used in FASB pronouncements issued by FASB that require or permit
fair value measurement.  This statement expands disclosures using fair
value to measure assets and liabilities in interim and annual periods subsequent
to the period of initial recognition.  SFAS No. 157 is effective
for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those
years.  Management adopted this statement on January 1,
2008.  The impact of adoption was not material to the Company's
financial condition or results of operations.  See Note 16 – Fair
Value Measurements.





DETERMINING
THE FAIR VALUE OF A FINANCIAL ASSET WHEN THE MARKET FOR THAT ASSET IS NOT
ACTIVE


In
October 2008, the Financial FASB issued FASB Staff Position (FSP) Financial
Accounting Standard 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not
Active.  The FSP clarifies the application of FASB Statement
No. 157, Fair Value
Measurements and provides an example to illustrate key considerations in
determining the fair value of a financial asset when the market for that
financial asset is not active.  The FSP is effective immediately, and
includes prior period financial statements that have not yet been
issued.  The Company is subject to the provisions of the FSP effective
immediately; however, the impact of adoption was not material to the Company's
financial condition or results of operations.





-10-




THE
FAIR VALUE OPTION FOR FINANCIAL ASSETS AND FINANCIAL LIABILITIES


In
February 2007, the FASB issued Statement of Financial Accounting Standards
No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities (SFAS
No. 159), including an amendment of FASB Statement No. 115.  SFAS
No.159 permits fair value accounting to be irrevocably elected for certain
financial assets and liabilities on an individual contract basis at the time of
acquisition or at a remeasurement event date.  Upon adoption of SFAS
No. 159, fair value accounting may also be elected for existing financial assets
and liabilities.  For those instruments for which fair value
accounting is elected, changes in fair value will be recognized in earnings and
fees and costs associated with origination or acquisition will be recognized as
incurred rather than deferred.  The Company adopted SFAS No. 159 on
January 1, 2008, but did not elect the fair value option for any assets or
liabilities for the year ended December 31, 2008.





BUSINESS
COMBINATIONS


In
December 2007, the FASB issued Statement of Financial Accounting Standards
No. 141 (revised 2007), Business Combinations(SFAS
No. 141R).  SFAS No. 141(R), among other things, establishes
principles and requirements for how the acquirer in a business combination
(i) recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any noncontrolling interest in the
acquired business, (ii) recognizes and measures the goodwill acquired in
the business combination or a gain from a bargain purchase, and
(iii) determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of the
business combination.  The Company is required to adopt SFAS No.
141(R) for all business combinations for which the acquisition date is on or
after January 1, 2009.  Earlier adoption is
prohibited.  This Standard will change theCompany's accounting
treatment for business combinations on a prospective basis.





NONCONTROLLING
INTERESTS IN CONSOLIDATED FINANCIAL STATEMENTS


In
December 2007, the FASB issued Statement of Financial Accounting Standards
No. 160, Noncontrolling
Interests in Consolidated Financial Statements, an Amendment of ARB No.
51 (SFAS No. 160).  SFAS No. 160 establishes accounting and
reporting standards for noncontrolling interests in a subsidiary and for the
deconsolidation of a subsidiary.  Minority interests will be
recharacterized as noncontrolling interests and classified as a component of
equity.  It also establishes a single method of accounting for changes
in a parent's ownership interest in a subsidiary and requires expanded
disclosures.  This statement is effective for fiscal years beginning
on or after December 15, 2008, with early adoption prohibited.
The Company does not expect the adoption of this Statement will have a
material impact on its financial position, results of operations or cash
flows.





DISCLOSURES
ABOUT DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES


In March
2008, the FASB issued Statement of Financial Accounting Standards No. 161,
Disclosures about Derivative
Instruments and Hedging Activities(SFAS No. 161).  This
statement requires enhanced disclosures to enable investors to better understand
the effects of derivative instruments and hedging activities on an entity's
financial position, financial performance, and cash flows, by requiring
disclosure of the fair value of derivative instruments and their gains and
losses in a tabular format.  It also provides more information about
an entity's liquidity by requiring disclosure of derivative features that are
related to credit risk.  It requires cross-referencing within
footnotes to enable financial statement users to locate important information
about derivative instruments.  SFAS No. 161 is effective for
fiscal years and interim periods beginning after November 15, 2008, with
early application encouraged.  Management does not expect the adoption
of this Statement will have a material impact on its financial position, results
of operations or cash flows.





THE
HIERARCHY OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES


In
May 2008, the FASB issued Statement of Financial Accounting Standards
No. 162, The Hierarchy of
Generally Accepted Accounting Principles (SFAS No. 162).  This
standard identifies a consistent framework, or hierarchy, for selecting
accounting principles to be used in preparing financial statements that are
presented in conformity with U.S. generally accepted accounting principles
(GAAP) for nongovernmental entities. It establishes that the GAAP hierarchy
should be directed to entities because it is the entity (not the auditor) that
is responsible for selecting accounting principles for financial statements that
are presented in conformity with GAAP.  SFAS No. 162 is effective
November 15, 2008 and there was no effect on the Company's consolidated
financial statements upon adoption.





WHERE
YOU CAN FIND MORE INFORMATION


Under the
Securities Exchange Act of 1934 Sections 13 and 15(d), periodic and current
reports must be filed with the SEC. The Company electronically files the
following reports with the SEC: Form 10-K (Annual Report), Form 10-Q (Quarterly
Report), Form 8-K (Current Report), insider ownership reports and Form DEF 14A
(Proxy Statement). The Company may file additional forms. The SEC maintains an
Internet site, www.sec.gov, in which all forms filed electronically may be
accessed free of charge.


The
Company links these reports to its website (www.pacificstatebank.com)
as soon as reasonably practicable after filing them with the SEC. None of the
information on or hyperlinked from the Company’s website is incorporated into
this Annual Report on Form 10-K.


-11-





ITEM 1A. RISK
FACTORS





The
Company and its subsidiary, Pacific State Bank, conduct business in an
environment that includes certain risks described below which could have
a material adverse effect on the Company's business, results of
operations, financial condition, future prospects and stock price. You are
also referred to the matters described under the heading "Cautionary
Statements Regarding Forward-Looking Statements," for additional
information regarding factors that may affect the Company's
business.





The
Company’s business is subject to interest rate risk, and variations in
interest rates may negatively affect its financial performance. Changes
in the interest rate environment may reduce the Company's net interest
income. It is expected that the Company will continue to realize
income from the differential or "spread" between the interest earned on
loans, securities and other interest-earning assets, and interest paid on
deposits, borrowings and other interest-bearing liabilities. Net interest
spreads are affected by the difference between the maturities and repricing
characteristics of interest-earning assets and interest-bearing
liabilities. In addition, loan volume and yields are affected by market
interest rates on loans, and rising interest rates generally are associated
with a lower volume of loan originations. We cannot assure you that we can
minimize the Company's interest rate risk. In addition, an increase in the
general level of interest rates may adversely affect the ability of certain
borrowers to pay the interest on and principal of their obligations.
Accordingly, changes in levels of market interest rates could materially
and adversely affect the Company's net interest spread, asset quality, loan
origination volume and overall profitability.





The
Company faces strong competition from financial service companies and other
companies that offer banking services, which can hurt Pacific State
Bancorp' business. The
Company's subsidiary, Pacific State Bank, conducts banking operations
principally in Stockton California and San Joaquin County. Increased
competition in the Bank's market may result in reduced loans and deposits.
Ultimately, it may not be able to compete successfully against current and
future competitors. Many competitors offer the banking services that are
offered by the Bank in its service area. These competitors include national
and super-regional banks, finance companies, investment banking and
brokerage firms, credit unions, government-assisted farm credit programs,
other community banks and technology-oriented financial institutions
offering online services. In particular, the Bank's competitors include
several major financial companies whose greater resources may afford them a
marketplace advantage by enabling them to maintain numerous banking
locations and mount extensive promotional and advertising campaigns.
Additionally, banks and other financial institutions with larger
capitalization and financial intermediaries not subject to bank regulatory
restrictions have larger lending limits and are thereby able to serve the
credit needs of larger customers. Areas of competition include interest
rates for loans and deposits, efforts to obtain deposits, and range
and quality of products and services provided, including new
technology-driven products and services. Technological innovation continues
to contribute to greater competition in domestic and international
financial services markets as technological advances, such as
Internet-based banking services that cross traditional geographic bounds,
enable more companies to provide financial services. If the Bank is unable
to attract and retain banking customers, it may be unable to continue its
loan growth and level of deposits, which may adversely affect its and the
Company's results of operations, financial condition and future
prospects.





Changes
in economic conditions could result in an economic downturn in Northern
California which could adversely affect the Company’s business. The
Company's business is directly affected by factors such as economic, political
and market conditions, broad trends in industry and finance, legislative
and regulatory changes, changes in government monetary and fiscal policies
and inflation, all of which are beyond the Company's control.
A deterioration in economic conditions locally, regionally or nationally
including as the result of terrorist activities within and outside
California could result in an economic downturn in Northern California and
trigger the following consequences, any of which could adversely affect the
Company's business:




·
            loan
      delinquencies and defaults may
increase;


·
            problem
      assets and foreclosures may
increase;


·
            demand
      for the Company's products and services may
  decline;


·
            low
      cost or non-interest bearing deposits may decrease;
  and


·
            collateral
      for loans may decline in value, in turn reducing customers' borrowing
      power, and reducing the value of assets and collateral as sources of
      repayment of existing loans.


·
            The
      Company has a concentration risk in real estate related
    loans.





At
December 31, 2008, approximately 65% of the Company's loan portfolio consisted
of real estate related loans. Substantially all of the Company's real
property collateral is located in its operating markets in Stockton,
California and San Joaquin County.  The Company has experienced a
substantial decline in real estate values in the Company's primary market
areas as a result of an economic downturn.  The Company’s management
has been proactive in working with borrowers having problems repaying loans that
have become delinquent or have the potential to become delinquent.  In
most cases, collateral values are sufficient to repay outstanding principal and
interest.  In the cases where collateral values have fallen short of
the principle and interest owed on the loans, management has reserved for the
estimated potential loss.  Other events including natural disasters
such as earthquakes, fires, and floods could materially effect real estate
values in the Company’s primary market areas. Such a decline in values could
have an adverse impact on the Company by limiting repayment of defaulted
loans through sale of the real estate collateral and by likely increasing
the number of defaulted loans to the extent that the financial condition of
its borrowers is adversely affected by such a decline in values. Those
events could necessitate a significant increase in the provision for loan
and lease losses which could adversely affect the Company's results
of operations, financial condition, and future prospects.





-12-




The
Company and its subsidiary Bank are subject to extensive regulation, which could
adversely affect its business. The
Company's and the Bank’s operations are subject to extensive regulation by
state and local governmental authorities and are subject to various laws
and judicial and administrative decisions imposing requirements and
restrictions on part or all of its operations. The Company believes that it
and its subsidiary Bank are in substantial compliance in all material
respects with laws, rules and regulations applicable to the conduct of its
business. Because the Company's business is highly regulated, the laws,
rules and regulations applicable to it are subject to regular
modification and change. There can be no assurance that these laws, rules
and regulations, or any other laws, rules or regulations, will not be
adopted in the future, which could make compliance much more difficult or
expensive, restrict the Company's ability to originate, broker or sell
loans, further limit or restrict the amount of commissions, interest or
other charges earned on loans originated or sold by the Company, or
otherwise adversely affect the Company's results of operations, financial
condition, or future prospects.





The
Company's allowance for loan losses may not be adequate to cover actual
losses. Like all
financial institutions, the Company maintains an allowance for loan losses
to provide for loan defaults and non-performance, but its allowance for
loan losses may not be adequate to cover actual loan losses. In addition,
future provisions for loan losses could materially and adversely affect the
Company's operating results. The Company’s allowance for loan losses is
based on prior experience, as well as an evaluation of the risks in the
current portfolio. The amount of future losses is susceptible to changes in
economic, operating and other conditions, including changes in interest
rates that may be beyond the Company’s control, and these losses may exceed
current estimates. Federal regulatory agencies, as an integral part of
their examination process, review the Company’s loans and allowance for loan
losses. Although we believe that the Company’s allowance for loan losses is
adequate to cover current losses, we cannot assure you that it will not
further increase the allowance for loan losses or that regulators will not
require it to increase this allowance. Either of these occurrences could
materially and adversely affect the Company's earnings.






ITEM 1B. UNRESOLVED STAFF
COMMENTS





Not
applicable





ITEM 2. PROPERTIES





The
Company owns its West March Lane and East March Lane facilities in Stockton, and
branches located in Modesto, Groveland, Angels Camp, Arnold and
Hayward.  The Company purchased the West March Lane office for
$867,000 in 1992.   The Company’s executive officers and support
staff were located in the West March Lane building from 1997 to
2004.  During 2001 the Company purchased an adjacent building to the
West March Lane office, for $747,000, in order to expand its administrative
functions.  The executive offices, finance department, central
operations and data processing were moved into these offices in 2004. The
Company repossessed a Modesto building and converted it to a banking branch in
1996.  The Modesto land was purchased in 1999 for
$524,000.  The Company purchased the Arnold branch for $600,000 as
part of its 1997 expansion into branches acquired from Valliwide
Bank.  During 2000 the Company purchased a lot in Groveland and
purchased a lot in Angels Camp in order to build and relocate the current branch
offices.  These sites offer the Company better visibility and
demonstrate commitment to the communities we serve.  The Groveland
property was purchased for $148,000 and construction was completed in January
2003.  The Angels Camp property was purchased for $200,000 and was
completed in the third quarter of 2003.  The Company purchased the
building in Hayward for $1,800,000 in July 2006 and purchased land on East March
Lane in Stockton for $728,000 in June of 2007 and constructed a branch that was
placed into service January 2, 2009 in order to replace the downtown Stockton
office, which was closed when its lease  expired December 31,
2008.




The
Company holds additional premises under lease which are presented
below:


·
            In
      1999, the Company entered into a 10-year lease with two options to extend
      for an additional 5 years each for the building in
  Tracy.


·
            In
      2005, the Company entered into a 10-year lease with four options to extend
      for an additional 5 years each for the building in Lodi.  The
      annual rent commenced in 2006 upon completion of the building and
      occupation by Pacific State Bank.





ITEM 3. LEGAL
PROCEEDINGS





There are
no material pending legal proceedings, other than ordinary routine litigation
incidental to its business, to which the Company is a party or of which any of
its property is the subject.





ITEM 4. SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS





No
matters were submitted to vote of the security holders during the fourth quarter
of the period covered by this report.





Item
(*)                      Executive Officers of the
Registrant.


The following table presents certain
information regarding the executive officers of the Company:




NAME
            AGE
            POSITION(S)
            SINCERick
      Simas
            47
            Principal
      Executive Officer
            2008Gary
      A. Stewart
            59
            Executive
      VP/CCO/Director
            1996Justin
      Garner
            27
            Vice
      President/CFO
            2008


(*)
Included pursuant to General Instruction (G)(3).


-13-


PART II




ITEM 5. MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES
  See
information under the caption “Market Price for Registrant’s Common Equity,
Dividends and Related Stockholder Matters” in the Company’s 2008 Annual Report
to Shareholders, which information is incorporated here by
reference.





ITEM 6.  SELECTED FINANCIAL
DATA





See
information under the caption “Selected Financial Data” in the Company’s 2008
Annual Report to Shareholders, which information is incorporated here by
reference.


ITEM 7. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION




See
information under the caption “Management’s Discussion and Analysis of Financial
Condition and Results of Operation” in the Company’s 2008 Annual Report to
Shareholders which information is incorporated here by reference.




ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISLOSURES ABOUT MARKET RISK




See
information under the caption “Liquidity and Market Risk” and “Net Interest
Income Simulation” in the Company’s 2008 Annual Report to Shareholders which
information is incorporated here by reference.





ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA





See
Report of Independent Registered Public Accounting Firm, Consolidated Balance
Sheet, Consolidated Statement of Operations, Consolidated Statement of Changes
in Shareholders’ Equity, Consolidated Statement of Cash Flows and Notes to
Consolidated Financial Statements, all contained in the Company’s 2008 Annual
Report to Shareholders, which information is incorporated here by
reference.




ITEM 9. CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE


None




-14-
  ITEM 9A. CONTROLS AND
PROCEDURES




The
management of Pacific State Bancorp, Inc. (the “Company”) is responsible for
establishing and maintaining adequate internal control over financial reporting,
as such term is defined in Exchange Act Rule 13a-15(f). The Company’s internal
control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of the financial statements for external purposes in accordance with generally
accepted accounting principles. The Company’s internal control over financial
reporting includes those policies and procedures that (i) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the Company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America, and that receipts and
expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the Company’s assets that could have a
material effect on the financial statements.




The
Principal Executive Officer  and Chief Financial Officer of the
Company have concluded, based on their evaluation as of the end of the period
covered by this Annual Report on Form 10-K, that the Company’s disclosure
controls and procedures are effective to ensure that information required to be
disclosed by the Company in the reports filed or submitted by it under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
and reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission, and include controls and procedures designed
to ensure that information required to be disclosed by the Company in such
reports is accumulated and communicated to the Company’s management, including
the Company’s Principal Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required
disclosure.  The design of any system of controls is based in part
upon certain assumptions about the likelihood of future events, and there can be
no assurance that any design will succeed in achieving its stated goals under
all potential future conditions, regardless of how remote.




There
were no significant changes in the Company’s internal controls or in other
factors during the last quarter of 2008 that have materially affected, or are
reasonably likely to materially affect, the Company’s internal controls over
financial reporting.




Because of its inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements. All internal control systems, no matter how well designed, have
inherent limitations, including the possibility of human error and the
circumvention of overriding controls. Accordingly, even an effective system of
internal control over financial reporting can provide only reasonable assurance
with respect to financial statement preparation. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that degree
of compliance with the policies or procedures may deteriorate.




Management has assessed the
effectiveness of the Company’s internal control over financial reporting as of
December 31, 2007, based on the framework set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control—Integrated Framework. Based on that assessment, management concludes
that, as of December 31, 2008, the Company’s internal control over financial
reporting is effective.




ITEM 9B. OTHER
INFORMATION





None


-15-


PART
III





Certain information required by Part
III is incorporated by reference from the Company’s definitive Proxy Statement
to be filed with the Securities and Exchange Commission in connection with the
solicitation of proxies for the Company’s 2009 Annual Meeting of Shareholders
(the "Proxy Statement").








ITEM 10. DIRECTORS, EXECUTIVE
OFFICERS AND CORPORATE GOVERNANCE





The
information required by this item is incorporated by reference from the table of
directors in the Proxy Statement and from information under the heading
“Corporate Governance.”





ITEM 11.  EXECUTIVE
COMPENSATION





The
information required by this item is incorporated by reference from the Proxy
Statement, including all information under the caption “Executive
Compensation.”




ITEM 12. SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS


The
information required by this item is incorporated by reference from the Proxy
Statement, including information under the captions “Principal Shareholders” and
“Stock Ownership of Management.”





ITEM
13.CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE





The
information required by this item is incorporated by reference from the Proxy
Statement, including all information under the subheadings “Director
Independence” and “Transactions with Management.”





ITEM 14.  PRINCIPAL ACCOUNTING FEES
AND SERVICES





The
information required by this item is incorporated by reference from the Proxy
Statement, including all information under the subheading “Principal Accountant
Fees and Services.”


-16-





PART
IV




ITEM
15.  EXHIBITS, FINANCIAL
STATEMENT SCHEDULES





(a)(1) The
following financial statements of the Company included in the Annual Report to
Shareholders for the year ended December 31, 2008, are filed and incorporated by
reference in Item 8 of this report


.


(i)
            Report
      of Independent Registered Public Accounting Firm, dated March 24,
      2009.


(ii)
            Consolidated
      Balance Sheet, December 31, 2008 and
2007.


(iii)
            Consolidated
      Statement of Operations:  Years ended December 31, 2008, 2007
      and 2006.


(iv)
            Consolidated
      Statement of Changes in Shareholders’ Equity: Years ended December 31,
      2008, 2007 and 2006.


(v)
            Consolidated
      Statement of Cash Flows:  Years ended December 31, 2008, 2007
      and 2006.


(vi)
            Notes
      to Consolidated Financial
Statements.




All
Schedules have been omitted because they are not applicable or not required or
because the information is included in the financial statements or the notes
thereto or is not material.




Exhibits
filed with this report are listed in the Index to Exhibits below, which is
incorporated herein by reference.




(b) The
Exhibits listed on the Index of Exhibits are filed and incorporated here by
reference.




(c) All
Schedules have been omitted because they are not applicable or not required or
because the information is included in the financial statements or the notes
thereto or is not material.




-17-





SIGNATURES





Pursuant
to the requirements of Section 13 of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.





Date:           March
31,
2009                                                                PACIFIC
STATE BANCORP








By:_/s/  Rick
Simas_______


Rick Simas


Chief Executive
Officer





Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.





Date:           March
31,
2009                                                                By:
/s/Rick
Simas


Rick Simas


Chief Executive
Officer








Date:           March
31,
2009                                                                By:
/s/Justin
Garner


Justin Garner


Vice President/Chief Financial
Officer





Date:           March
31,
2009                                                                By:
/s/Michael L.
Dalton


Michael L. Dalton


Director and Chairman
of the Audit Committee





Date:           March
31,
2009                                                                By:
/s/  Harold
Hand


Harold Hand


Director and Chairman of the
Board





Date:           March
31,
2009                                                                By:
/s/Patricia A.
Hatton


Patricia A. Hatton


Director
and Chairperson of the Director Loan Committee





Date:           March
31,
2009                                                                By:
/s/ StevenJ.
Kikuchi


Steven
J. Kikuchi


Director





Date:           March
31,
2009                                                                By:
/s/ Maxwell
Freeman


Maxwell
Freeman


Director





Date:           March
31,
2009                                                                By:
/s/ Yoshikazu
Mataga


Yoshikazu
Mataga


Director





Date:           March
31,
2009                                                                By:
/s/ Gary A.
Stewart


Gary
A. Stewart


Executive
Vice President/Chief Credit Officer


Director




Date:           March
31,
2009                                                                By:
/s/ Russell G.
Munson           Russell
G. Munson


Director
and Secretary of the Board




-18-





INDEX OF EXHIBITS




3.1
                  Articles
      of Incorporation, as amended. Incorporated by reference from Exhibit 3.1
      filed with the Company's Form 10-K for the year ended December 31,
      2004.3.2
                  Bylaws.
      Incorporated by reference from Exhibit 3.2 filed with the Company’s
      Registration Statement No. 333-84908 on Form S-4EF (the
      “S-4”).4.1
                  Agreement
      to file copy of Indenture for the Company’s $3.5 Million of Floating Rate
      Junior  Subordinated Deferrable Interest Debentures due 2034
      issued to Pacific State Statutory Trust II.  Incorporated by
      reference from the Company’s Form 10-K for the year ended December 31,
      2003.4.2
                  Agreement
      to file copy of Indenture for the Company’s $5.0 Million of Floating Rate
      Junior Subordinated Deferrable Interest Debentures due 2037 issued to
      Pacific State Statutory Trust III.  Incorporated by reference
      from the Company’s Form 10-K for the year ended December 31,
      200710.1
                  Lease
      Agreement for Main Office. Incorporated by reference from Exhibit 10.1
      filed with the S-4.10.2
                  Lease
      Agreement for Lodi Office. Incorporated by reference from Exhibit 10.2 to
      the Company’s  Form 10-K for the year ended December 31, 2005
      (the “2005 10-K”).10.3
                  Lease
      Agreement, Tracy Branch Office. Incorporated by reference from Exhibit
      10.3 filed with the S-4.104.1*
                  Form
      of Salary Continuation Agreement. Incorporated by reference from Exhibit
      10.5.1 to the 2005 10-K .10.4.2*
                  Form
      of Split Dollar Agreement. Incorporated by reference from Exhibit 10.5.2
      to the 2005 10-K .10.5*
                  1997
      Stock Option Plan. Incorporated by reference from Exhibit 10.6 filed with
      the Company’s Quarterly Report on Form 10-Q for the quarterly period
      ending September 30, 2003.13
                  The portions of the Pacific State Bancorp 2008 Annual
      Report to Shareholders which have been incorporated by reference in Items
      5-8 herein are filed with the Commission.21
                  List of Subsidiaries23
                  Consent of Independent Registered Public Accounting
      Firm31.1
                  Certification of the Principal Executive
      Officer  (section 302 of Sarbanes-Oxley
  Act)31.2
                  Certification of the Chief Financial Officer
      (section 302 of Sarbanes-Oxley Act)32.1
                  Certification of Principal Executive Officer 
      pursuant to section 906 of the Sarbanes-Oxley Act32.2
                  Certification of Chief Financial Officer pursuant to
      section 906 of the Sarbanes-Oxley Act*
                  Denotes
      management contract or compensatory
arrangement





-19-